Home > Uncategorized > The return of ‘land’ in macro economic discourse. Wonkish

The return of ‘land’ in macro economic discourse. Wonkish

Summary. One of the most influential critics of the ideas of Piketty is Matthew Rognlie – who, to be able to write down his criticisms and following the national accounts, reintroduced the idea of ‘land’, or unproduced inputs like land and natural resources including land underlying buildings, in a neoclassical world. Herewith he undid the work of John Bates Clark, who purged ‘land’ from the concept of capital of classical economics, therewith enabling the rise of neoclassical economics. But this is not the only example of the return of land into economic discourse – land has made quite a return. Some examples:

Classical economists made a distinction between the factors of production ‘land, labour and capital’ while neoclassical economists only distinguish ‘capital and labour’ – which, as this disables any analysis of incomes related to the ownership of ‘land’ (not just land but also other unproduced inputs like oil or clean air), enabled neoclassical economists to restrict their attention to the asset side of the national balance sheet and to describe the distribution of income as a process unrelated to ‘property’ and ‘ownership’. According to economists like Mason Gaffney and Fred Harrison, purging the concept of ‘land’ from neoclassical economic discourse was a deliberate act, sponsored by people owning ‘land’, to enable exactly such a class free, a-historical, harmonious description of modern economies.. ‘Land’ has, however, made a glorious comeback. Below, I’ll point out some landmark studies.

  1. We can make a distinction between factors of production and factors of distribution. The asset side of the balance sheet shows the value of produced and unproduced non-labour inputs as well of the value of financial assets owned by a household, a company, a government or even an entire country, including non-tangible ones like ‘Goodwill’ and the value of patents. Though aggregating the value of these pretty heterogeneous assets is tricky side is somewhat ‘objective’. The non-financial assets are factors of production. The liability side of the balance side shows who ‘owns’ these factor. ‘Owns’ between parentheses as ownership should be understood as a bundle of rights and here for instance including the ownership of rights to interest payments of a lender who has lent money to a household, a company or the government. An example: when I do not pay my mortgage (and even when I do…) Dutch law and the mortgage contract give my bank the right to sell my house – a right which banks however sparingly use in my country. As will be clear (I hope) there are quite some historical, international and cross-sectional differences between households and companies when it comes to these ownership rights. Clearly, differences and changes in the structure and nature of ownership (including what can be owned!) influence the distribution of income between households, companies and the government. Much more elaborate on such issues: Jamie Morgan.
  2. Land is defined, here, as ‘unproduced assets’, which have economic value as humans use them. The obvious but, in a quantitative sense, not the most important kind of land is agricultural land. Mind: improvements (like drainage systems) are not a part of ‘land’ but of gross fixed capital. Here is a map of the ‘surface area required to power the world’ using solar cells. The point: soon as the infrastructure to tap and transport solar electricity is installed, ‘surface area’ in the neighbourhood of sun farms will rise in value, as it will be convenient to use the existent infrastructure to expand production: typically, the value of ‘land’ is not only dependent upon improvements by the owner (i.e. placing solar cells) but also upon improvements and investments by other people or by the government. To put in a ‘Piketty’, the movie ‘Once upon a time in the west’ (voiceover: ‘a manhunt, a land grab’) is about exactly this – and about the sometimes brutal nature of the distribution of ownership rights (aside – linking to this movie is not good for blogging productivity). This already holds for agricultural land but a fortiori for land in cities – which is often weirdly expensive as it is weirdly valuable, because of all the roads and houses and companies around it. Look here for $1.000.000,– parking spaces in New York. But ‘Land’ as used here also consists of oil, copper ore and, as far as I’m concerned, of clean air. Which has a cost price. Think of the costs of the catalytic converters we use in cars to prevent pollution.
  3. At this moment we see a revival of ‘land’ in economic theory. The magnitude of this survival is surprising and its exact timing too. But it was bound to happen. Way back in the fifties ‘land’ had become a minor asset class compared with its overriding importance only fifty years before. But as cities increased, economies grew, as out use of primary products like copper and oil grew and as ‘helicopter money’ printed by the banks fuelled house price increases but also as the average number of persons per house decreased its importance increased – and not with a little bit. Look here for some data on this process.
  4. Economic statisticians – often the first economists to catch up on changes in the economy! – were ‘ahead of the curve’ to acknowledge this and developed and measured (as part of those much maligned but actually pretty glorious national accounts) sectoral as well as national balance sheets, including ‘land underlying houses, other buildings and roads’ and natural resources. Which showed unequivocally that ‘land’ had become a mayor asset class (not to say: the mayor asset class) once again. In the USA. In Germany. In Sweden. In France. In the Netherlands. In the UK. It turns out that this development is not bound to national boundaries.
  5. Comes in: Piketty. These national accounts data are the very data which are, 1:1, the starting point for the economic history work Piketty and his comrades, who extended the official series (which often start somewhere in the seventies of the twentieth century) backwards to 1800 and even beyond. Which clearly shows the decline and rise of ‘land’ as an asset. But with, to the horror of neoclassical economists, also showed that ‘capital’, as defined on the liability side of the balance sheet, is a historical and in a sense ‘revolutionary’ construct as best exemplified by the disappearance of slaves from the sectoral and national balance sheets of the USA. From Cromwell to Abraham Lincoln and Castro revolutions and revolutionary leaders have, for better or worse, influenced and defined what we call ‘capital’. Which, of course, also means that the distribution of the spoils is influenced by these changing definitions.
  6. As is well-known it is pretty difficult to make a consistent estimate of the aggregated value of heterogeneous assets which are produced in different years of even periods and which are sometimes traded on the market (second hand planes) and have, hence, market prices but which sometimes ‘only’ have a (changing) production cost price and a replacement price as they are not traded by strong consensus (coastal levees). I’ll not delve into this in this post. But it is ironically to note that the favorite valuation method of economists (discounting forecasted future streams of incomes using a forecasted interest rate) is the one method not used by economic statisticians as it does not yield stable results.
  7. The work of Piketty c.s. was commented upon by scores of other economists. Here it comes: the arguably most influential of these, Matthew Rognlie, undid what John Bates Clark and (following him) Solow explicitly did: purging land from the neoclassical production function – but Solow can be excused a little as, in the fifties, land was indeed less important than it is nowadays (Solow, R. M. (1956), ‘A contribution to the theory of economic growth’, The quarterly journal of economics 70-1 pp. 65-94.). Impressed by the national accounts data which showed the come back of land as an asset and by the obvious economic difference between unproduced and produced capital Rognlie explicitly reintroduces ‘land’ in the neoclassical production distribution function. It would indeed by ironic when, as is not impossible, Rognlie would receive the John Bates Clark medal for undoing the work Clark is most notorious for! interestingly, Clark also was the auctor intellectualis of the concept of the ‘representative consumer’, the idea that a market based society can be described as a harmonious person, without regard to class, age, wealth, power or class. Clearly, making a distinction between ‘land’ and ‘gross fixed capital’ almost necessarily introduces an ownership category like ‘house owners’ into the equation and therewith by necessity also people who do not own a house, wich demolishes the idea of a single representative consumer. Aside – many people praise him for showing the importance of ‘land’ but even a quick scan of the national accounts data (or a fast look at the Piketty graphs) shows this.
  8. But Piketty and Rognlie are not the only ones to focus on land. Jorda, Schularick and Taylor showed that no less than two-thirds of non-interbank lending of banks serves to finance mortgages and, hence, to quite an extent the purchase of ‘land underlying houses’. Caveat: this is net lending. The share of housing in gross lending (including the temporary financing of business purchases and international trade) is a lot smaller. Even then, the share of non-depreciating land on the balance sheets of banks increased, and increased. Land is of prime importance to the balance sheet of banks which of course means that banks have become increasingly vulnerable to land price bubbles and busts.
  9. And we can also point to increased coverage of house prices (including the price of new dwellings) by institutes like Eurostat and the Bank of International Settlements. Not exactly land prices – but related to it.

So, ‘land’ (as stated: including limited natural resources) is back, in the national accounts, in the discourse on inequality and distribution and in financial macro economics. Policies have to follow. One possibility: introduce a land tax, the ‘land’part of the purchasing prices of existing and new dwellings should be financed by national pension funds, the ‘dwelling part’ might be financed by banks.

  1. September 28, 2015 at 12:34 pm

    Nowhere land
    Comment on Merijn Knibbe on ‘The return of ‘land’ in macro economic discourse. Wonkish’

    (i) The misrepresentation of land in economic theory started already with Ricardo’s concept of rent (2011). The deeper problem is that economists never understood what profit is. Therefore, because profit theory has been false from the very beginning, the concept of rent has been misleading, and distribution theory had no foundation whatsoever since the classics (2014). Neoclassics only worsend the situation.

    (ii) In order to integrate land into the theory of market interaction the distinction between primary and secondary markets is essential (2011). Both types run on entirely different principles. The standard supply-demand-equilirium analysis is not applicable to begin with.

    (iii) With the distinction between primary and secondary markets comes the distinction between monetary profit and nonmonetary profit. What is also needed is the distinction between monetary and nonmonetary saving. The latter applies in the case of changes of asset values which affect the household sector’s net worth directly.

    (iv) For the definition of property and the possible use of land for ‘painless’ taxation see (2015).

    (v) For the relationship between financing, asset valuation, rate of interest and profit see (2012).

    Note in addition:
    — The familiar well-behaved production function is a nonentity. Therefore, all models that contain one are worthless. From this follows that neoclassical production and distribution theory has always been unacceptable.
    — As far as land/real estate is used as collateral it does not appear on a bank’s balance sheet. Price changes indirectly influence the riskiness of a loan which, however, becomes effective only in the case of default.

    In sum: the treatment of land in the history of economic thought is indeed the unassailable proof for the scientific incompetence of economists.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL http://ssrn.com/abstract=1917012.
    Kakarot-Handtke, E. (2011b). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
    http://ssrn.com/abstract=1932119.
    Kakarot-Handtke, E. (2012). Make a Bubble, Take a Free Lunch, Break a Bank. SSRN Working Paper Series, 2167234: 1–35. URL http://ssrn.com/abstract=
    2167234.
    Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741:
    1–23. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741.
    Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Institutions. SSRN Working Paper Series, 2598721: 1–18. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2598721.

  2. merijnknibbe
    September 28, 2015 at 3:01 pm

    Agree!

    • David Chester
      September 1, 2016 at 10:34 am

      Disagree!

      Land and other natural resources like the electromagnetic wave spectrum for which access rights are extremely valuable in communications, must be separated from the durable capital goods that the capitalists own and hire out. The Cobb-Douglas function has but two determinate terms, but when land is properly included in this form of the “utility-function” it will then correctly have all 3 returns on the factors of the Smithian thesis for production. We are still suffering from the deliberate Bates inspired confusion of coupling land as property along with durable capital. The bald statement above, that the production function is a non-entity has not been substantiated–and since this is another word for the CD equation it is not correct.

      Profit does not exist, since all 3 returns from production are covered in the Smithian theory, but interestingly enough the concept of profit is a vital one for businesses people to get their inspiration from and to become active! This is a purely psychological effect, because it does not result in the distribution of re-distribution of ground-rent, wages, or interest and dividends from the above combined productive factors process. Where do we see profit on the balance sheet, unless it is within one of these returns? The chances are that the businessmen consider some of their (rack) rent, (bonus) wages or (uncapitalized) interest to be profit, but this is not the actual situation.

      And to provide unassailable proof about scientific incompetence of economists surely requires more that a single statement. Some economists, the followers of Henry George in particular, have never wavered.

  3. Macrocompassion
    September 29, 2015 at 3:29 pm

    On the topic of Land Value Taxation a number of points arise:

    15 ASPECTS of LAND-VALUE TAXATION affecting Government, Land Owners, Community and Ethics

    3 aspects for GOVERNMENT
    1. LVT, adds to the national income. .
    2. The cost of collecting the LVT is much smaller than for income tax and other production-related taxes.
    3. With LVT, the national economy stabilizes and no longer experiences the 18 year housing boom and bust cycle.

    6 aspects affecting LAND OWNERS
    4. LVT is progressive, the owners of the most potentially productive sites pay the most tax.
    5. The land owner pays his LVT regardless of how the land is used. When the land is leased to tenants most or all of the resulting ground-rent is the tax.
    6. LVT stops the speculation in land prices because any withholding of land from proper use is too costly.
    7. The introduction of LVT reduces the sales price of sites even though their value (or potential usefullness) may continue to grow.
    8. With LVT, land owners are unable to pass the tax on to their tenant renters, due to the competition for land use.
    9. With the introduction of LVT, land prices will drop. Speculators in land values will tend to foreclose on their mortgages and to withdraw their money for reinvestment. LVT should be introduced gradually. It allows investors sufficient time to transfer money to company-shares where their greater use will meet the increased demand for produce (see below).
    3 aspects regarding our COMMUNITY
    10. With LVT, there is an incentive to use land for production, rather than it laying idle or being partly used.
    11. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper because entrepreneurs have less difficulty in starting-up and running their businesses. Demand grows, unemployment decreases
    12. As LVT is introduced, investment money is withdrawn from land and placed in durable capital goods.

    3 aspects about ETHICS
    13. The collection of taxes directly from productive effort and commerce is socially unjust. LVT replaces this form of extortion by gathering the surplus rental income which comes without exertion. Consequently LVT is a natural system of money-gathering.
    14. Bribery and corruption cease with LVT. Before, this was due to the leaking of news of municipal plans for housing development.
    15. When land values are taxed, the land is used more efficiently and city sprawl is reduced with lower expenditure in the associated services provided by the city or municipal authority. People live closer to their places of work, social exchange, sport, entertainment, etc. This saves everybody time and traveling cost.

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